Mumbai: PSU banks have closed the profitability gap with private lenders, but the valuation gap remains wide-as it has for decades. Despite 16% loan growth, sub-1% net NPAs and four years of strong earnings, none of the state-run banks are yet trading above two times book value, unlike private banks.The market continues to reward private lenders for their ability to generate higher returns through better customer service, stronger pricing power and a more consistent track record of value creation.
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For instance, State Bank of India (SBI), the bellwether for PSU banks, has recorded a consistent double-digit growth in net profit for the last four years, led by continued loan growth, better asset quality and supported by treasury income.
In FY26, SBI’s net profit growth at 13% beat the 11% growth reported by its private sector competitor HDFC Bank and more than double the 6% growth reported by ICICI Bank.
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On credit growth, the key revenue engine for banks, public sector banks have matched the pace of their private sector counterparts at a 16% expansion rate -in line with the growth seen by their private sector counterparts.
More notable is the improvement of asset quality for all public sector banks, with the net NPA ratio below 1% for two consecutive years for the top seven listed lenders. Some outperformers, such as Bank of Maharashtra (BoM), recorded a net NPA of 0.12% in the latest published numbers for the first half of the current fiscal year.
Analysts, however, say merely matching private peers isn’t enough for government banks to catch up on the valuation sweepstakes.
For investors to continue looking at them favourably, these lenders will have to find new triggers of growth and performance because they may face headwinds in terms of higher provisions due to the new expected credit loss (ECL) provisions, higher wage costs, treasury losses due to higher government security yields, and the uncertainties linked to consolidation.
“I think the best phase of public sector profitability could well be behind us as unlike the last four-five years they will now face considerable headwinds,” said Anand Dama, head BFSI research at Nuvama Institutional Equities. “All the progress they have made in creating value through internal reforms may not be enough for them to overcome the hurdles.”
To be sure, the price to book value of the best public sector lender (BoM) at 1.95 is still much lower than the 2.85 of the most valued private-sector bank by that metric (ICICI Bank). Latest data shows that at least four medium and large private sector banks are above the price to book ratio of 2 currently, while not even one PSU bank has made that cut at the end of the first half of the current fiscal.
Such a valuation gap isn’t new. Rather, it has persisted for decades, ever since private banking licenses were given.
“It’s probably the public sector discount at work in the markets,” Arundhati Bhattacharya, the then chairman of SBI, said in a media interview a decade ago when asked why the valuation parameters for private lenders reflect a significant premium over state banks.
